Tanzania – Economic light in gloomy world – 4

19Apr 2016
Ambassador Juma v Mwapachu
The Guardian
Pictorial & Analysis
Tanzania – Economic light in gloomy world – 4
  • In this fourth and final part of a review of some of the key ‘headwinds’ (both exogenous and endogenous) that impact Tanzania’s economic growth, we focus on issues about the national debt.

I will look for another opportunity in the future to discuss how quality education has close causal relationship with economic growth and how science, technology and innovation, importantly influenced by knowledge and skills, are vital drivers of social and economic transformation.

Quality Education and Innovation

Indeed, a country that does not significantly invest in technological innovation cannot address the critical challenges encountered both in the social and economic spheres. These innovations as well articulated by Harvard’s professor Calestous Juma are principally three:

First, building good infrastructure-energy, transportation, water and sanitation, irrigation and telecommunications. Second, upgrading quality of education by promoting technical competence and skills. Third, promoting technology-based entrepreneurship and fostering close relationships among government, business and academia.

Specifically, in the context of the state of the total public debt (which has risen from 10.3trn/- as at December, 2005 to 44trn/- in April, 2016) and its close nexus with the enduring fiscal deficit, it is important to make reference to three recent reports from the Ministry of Finance, the World Bank (WB) and the International Monetary Fund (IMF), which offer relevant perspectives on Tanzania’s economy with special reference to some of these ‘headwinds’.

Ideas about Tanzania’s Economic Challenges

First, is the June 2015 report of the Ministry of Finance entitled, ‘Fiscal Risk Statement’ prepared within the context of the fiscal surveillance framework set out in the East African Community as part of the process towards realizing the agreed macro-economic convergence criteria as well as a requirement for meeting the IMF Policy Support Instrument benchmark. At the outset, I should commend the government for this particular approach to managing the economy through a risk-based fiscal framework.

Tanzania’s Fiscal Risks

As the statement itself outlines, it is imperative that Tanzania is well positioned to navigate different exposures encompassing terms of trade, exchange rate, commodity prices, investment, public debt dynamics, revenue patterns, operations of the government and parastatals, contingent liabilities and unforeseen natural disasters, including climate change.

It would be worthwhile if the preparation of such statement could involve the Tanzania private sector through a more robust utilization of the Tanzania National Business Council (TNBC), which has become almost moribund and largely a ‘talking shop’ even when it meets.

Tanzania Immune or Not Immune to External Shocks?

Second, is the July 2015 report of the World Bank entitled ‘Tanzania Economic Update’. I must state that I have had some misgivings about this report, which contradicts itself on some key economic narratives.

For example, the report states that, on the one hand, the ‘Tanzanian economy is not immune to external shocks’ and ramifies that its trade balance could be impacted negatively and there is enough data to show such impact but, on the other hand, the report asserts that ‘the stability of the Tanzanian economy has not been significantly impacted by the recent turbulence in world commodity prices’ citing the realized high economic growth and low inflation. It sounds too static an analysis, devoid of a dynamic approach to assessing economic performance, going forward.

The report seems to contradict itself when it states that the decline in oil prices has generally had a positive impact on the local economy, focus being centred on the decline in the cost of the import bill (and not on the cheaper oil having helped to stimulate higher growth considering that sectors of the economy that are actually not so much oil -sensitive in utilization, such as services and communications, contributed large chunks of GDP).

It would be interesting were the Tanzania Bureau of Statistics and the Bank of Tanzania to undertake a more intricate study of how the key sectors of the economy have actually benefitted from low oil prices and the concomitant impact on economic growth more broadly.

Impacts of Shilling’s Depreciation

Yet the same report asserts that the depreciation of the Tanzania shilling has ‘reversed’ the benefit of the assumed lower energy prices, electricity being one of the larger consumers of oil.

15 per cent of Tanesco’s total costs are on fuel. In fact, it goes on to observe that low fuel prices have had marginal impact on the majority of households thus not touching on improving broad livelihoods.

Moreover, where the World Bank report falls short is in respect of the impact of depreciation of the shilling in three areas: one, on the real value of the hyped higher exchequer revenue collections as pronounced by the Tanzania Revenue Authority (TRA) since the on-set of the Magufuli government.

So whilst total revenue increased from 9.365trn/ in 2013/14 to 9.98trn/- in 2014/15, a 6.2 per cent growth, in real terms, if you consider US dollar values, revenue collections were lower because during the period the shilling depreciated by about 20 per cent.

Even if you were to consider the high recent receipts of about 1.4trn/- per month, in real terms the actual revenue increase is unsubstantial.

Growth of Debt and Implications

Thus, also going by World Bank’s data that in 2014/2015 the total cost of servicing the public debt accounted for 14 per cent of domestic revenues, up from six per cent in 2008/09, surely, given the depreciation of the shilling, the level of debt service has gone up and the hype about Tanzania’s ‘low risk for debt service’ may probably be overplayed.

More worrisome is what the World Bank points out, that whilst Tanzania’s stock of public debt (which stood at nearly 41trn/- as of September 15, 2015, 35trn/- being external debt)) was projected to surge from 32 per cent of GDP in 2013/14 to 33 per cent in 2014/15, when the conversion of existing arrears of dues to pension funds and contractors, which is in trillions of shillings, is done, however, the public debt may rise to 39 per cent of GDP.

And debt service ratio would also rise from 14 per cent to 22 per cent of total government revenues. It is vital to ask how such a huge debt service level would not qualify as high risk especially given the exchange rate depreciation of the shilling.

It is also important for the government and citizens to note that a significant chunk of the government revenue actually goes into importing medicines and other products that demand foreign exchange and thus making the real value criteria of what is actually collected by TRA of critical relevance. In fact, the Ministry of Finance’s Fiscal Risk Statement already referred to above pertinently points out a relevant second issue, namely, that the volatility of the exchange rate also negatively affects debt repayment, both principal and interest.

Exchange Rate Volatility and Business Performance

The third area which is not normally easy to think about and comprehend is how the depreciation of the shilling negatively impacts some of the new revenue cash cows whose top line revenues are significantly impacted by costs of essential imported materials and products.

For example, all the telecom companies import significant communications equipment and software for purposes of continuous expansion of networks and service delivery improvements.

Moreover, they are also required by the regulator, TCRA, to pay annual fees and penalties in US dollars. Yet all their charges and earnings are in shillings. And because service affordability is low given the high taxation on mobile phone business, totalling around 40 per cent of revenue, increasing tariffs cannot be the right option. It would merely erode business turnover.

What is likely to occur is reduction in revenue contribution to the exchequer. It would tantamount to killing the goose that lays the golden egg.

In the end, telecom business is increasingly becoming unprofitable and were it not for the mobile money transfer the worse could have happened. This is the reason why I propose that the Fiscal Risk Statement should be informed by what is taking place in key sectors of the economy that have important contribution to fiscal receipts. The TNBC should be better utilized in this regard.

It is also important to note that the depreciation of the shilling has impacted the vitality of the domestic stock market where market participants, particularly foreign investors who in recent years have bolstered shares market buoyancy, have seen their returns fall dramatically thereby undermining their continued appetite to invest.

The Dar es Salaam Stock Exchange has disclosed that market liquidity or trading turnover between the last quarter of 2015 and March, 2016 has declined from 286bn/- to 123bn/- and domestic market capitalization also saw a decline in the period between January and March, 2016 from 9.52trn/- to 8.47trn/- largely due to exogenous factors.

Our point is this: the World Bank and the IMF should not downplay, as they do, the impact of the global economic turbulence on Tanzania’s economy.

Tanzania- ‘World’s Worst Revenue Collector

One of the key issues raised in the World Bank report is Tanzania’s poor record of revenue collection, described as the ‘worst in the world’ at 12 per cent of GDP.

The implication is that Tanzania continues to suffer fiscal deficits which put the government under pressure by becoming over-reliant on foreign government budget support and on domestic borrowing.

With the high population growth being experienced and which aspect we have addressed as one of the ‘headwinds’ to take control of, adequacy of government support for social services like education and health will inevitably become highly challenging.

Government’s Domestic Borrowing and Effects

As a consequence, the government, through the Bank of Tanzania, has already increased its domestic borrowing though issue of government securities and bonds.

In the past four months, the interest rate returns on such securities and bonds have hovered between 15-17 per cent for different tenors (of 182 and 364 days). In turn, commercial banks, which during 2014/15 had lowered returns on fixed deposits from averages of 14 per cent for 364 days to 10 per cent to boost their returns on normal savings deposits, have found themselves struggling for savings, which fund their credit portfolios as customers shift their savings to bonds and treasury securities.

The resulting ‘crowding out’ effect has been phenomenal with commercial banks themselves resorting to the ‘comfort zone’ of investing in government securities and bonds. But it is all bad economics because it is the job-creating real sectors of the economy that suffer the ‘unintended consequences’ of such a fiscal policy-driven monetary policy. Economic growth is undermined.

Debt Arrears with Pension Funds and Tanesco

Third is the February, 2016, Policy Support Instrument report of the IMF. Unlike the World Bank report, this report reflects a very soft position about Tanzania’s fiscal deficits, huge debt arrears to pension funds and Tanesco and the broad public debt.

Given the seriousness of the public debt, an enduring fiscal deficit and exchange rate weakness of the shilling (which has no positive exports spill overs due to the weak exports base and global commodity market volatilities), we find the IMF position largely unconvincing. Yet it is the same IMF that put on the brakes against Tanzania’s attempt to issue a US$1 billion debut Eurobond during fiscal 2015/16.

Of course, economists still debate on whether debt rather than fiscal deficits has real effect on growth. Yet a number of leading economists like Rubin and Mankiw have observed that rising debt levels (and which Tanzania has witnessed since 2008/09) can dampen the appetite of investors because of the resulting uncertainty of a nation’s capacity to service debt on maturity and can also trigger interest rate hikes which hurt economic performance. This is particularly so in developing economies.

Indeed, the World Bank and IMF positions about Tanzania’s debt sustainability centre on addressing the fiscal deficit through higher focus on the tax regime and government borrowing.

It is questionable though how BoT’s short-term fiscal stimulus through high interest rate returns on treasury bills would not result in long-term secular costs of burdensome high debt service.

Conclusion
Tanzania is clearly one of the African countries heading towards a debt crisis (even when its current debt level is below 50 per cent of GDP (though following the rebasing of the GDP, now standing at around 90trn/-, the total stock of debt would now represent a delicate 49 per cent of GDP with the fear that most of the huge debt arrears to pension funds have not been included in the debt stock figures).

But it is the large external debt, persistent current account deficit, huge negative external trade balance, high debt service arrears, uncertain donor budget support, uncertain availability of risk capital to fund infrastructure projects and vulnerability to currency exchange risk that spell dangerous times ahead.

It will thus be important to learn where the confidence about debt sustainability comes from given Tanzania’s problems of structural growth and low productivity in the real sectors of the economy.

I propose that the Governor of Bank of Tanzania gives a State of Economy address in the National Assembly twice a year followed by discussions at Committee levels.